Understanding IRS form 1099-K letters and how to quickly respond.

• Author: Adams, Bob

Taxpayers that sell products or services online or accept payment cards for sales, as well as their advisers, need to be aware of IRS notice letters relating to Form 1099-K, Payment Card and Third Party Network Transactions, so they may quickly respond to the IRS when necessary.

Created by Section 3091 of the Housing and Economic Recovery Act of2008, P.L. 110-289, the Form 1099K information reporting rules require payment settlement entities (PSEs) to report to the IRS the gross dollar amount of card or third-party network payments processed for participating payees. PSEs are credit or debit card issuers (e.g., American Express or Visa) or third-party networks (e.g., PayPal), and participating payees include merchants or business payees that accept debit or credit cards or third-party network payments. PSEs must file Form 1099-K with the IRS and participating payees. Form 1099-K is required under Sec. 6050W and its regulations, effective for calendar tax year 2011 (Regs. Sec. 1.6050W-1).

Information reporting has become a prime avenue for the IRS to increase compliance while expending fewer resources. Compliance with tax laws increases when a taxpayer knows that a payer has reported to the tax authority the amount of payments made to the taxpayer. In addition, since information reporting allows the IRS to see what payments taxpayers receive, the IRS can better enforce compliance. Information reporting on the Form 1099 series (e.g., Form 1099-INT for interest payments and Form 1099-DIV for dividend payments) has been used for many years to simultaneously report to the IRS and payment recipients the amount that payment recipients received in a given calendar year. Form 1099-K reports amounts that should be included in top-line business revenues and is simply another example of information reporting the IRS uses to reduce the tax gap (the amount of tax owed but not paid).

Unlike with other Forms 1099, the IRS may be unable to verify a Form 1099-K amount based on a taxpayer's income tax return without first requesting additional information from the taxpayer. This occurs because participating payees may, for example, report card payments on a net basis in their income tax returns while PSEs report gross payments on Forms 1099-K. Consequently, as discussed below, the IRS uses Form 1099-K and notice letters to ferret out potential unreported noncard payment income.

Filing Requirements and Backup Withholding

According to the IRS, Form 1099-K...